Report: Social networks flourish - but still have to solve the targeted ads riddle

An in-depth study by Nielsen Online confirms that social networking has become a ubiquitous part of our online lives, with two-thirds of the world's online population contributing to some form of member community at least once each month. Those with impossibly bulging inboxes won't be surprised to learn that social networking sites are now more popular than web-based email services like Hotmail, and that we spend nearly 10% of our online time using social networks.

The star pupil in Nielsen's report is Facebook, on which the Collins English Dictionary bestowed mainstream status last year by including as both a noun and a verb. The site now dominates the European market and is set to overtake MySpace in its native US. Facebook grows; MySpace slumps

On Nielsen's figures, its global audience of 108.3m users each month is equivalent to 30% of the world's web users. That reach grew 168% through 2008 alone, while arch-rival MySpace saw its global audience drop by 3% to 81 million monthly users. And in the UK, Facebook is used by a staggering 47% of the online population.

Time spent on Facebook increased by 566% from December 2007 to December 2008, compared to around 18% for the web overall.

Nielsen credits Facebook's growth to simple design, broad appeal, better privacy controls and more inventive features than its rivals. But crucially, despite its popularity, Facebook's focus on communication over entertainment makes it a less comfortable sell for advertising - even though its fastest growing userbase has been the older, more valuable 35-49 age group.

MySpace and Bebo both focus on entertainment content, which creates a more comfortable, complementary space for brands - and can tap the infrastructure of respective parents companies News Corp and AOL.

The big three struggle in China and Japan

Outside Europe and North America, China is a critical market but subject to very regulatory challenges and, like Japan, presents particular cultural and linguistic issues; consequently domestic brands dominate. 51 is biggest in China and Mixi in Japan, and in Brazil Google-owned Orkut is 29 times more popular than Facebook.

In sharp contrast to ITV's awkward acquisition of Friends Reunited, Germany's Bertelsman executed a smart move buying half of Wer-kennt-wen in February last year. One year later, the site is the country's most popular social network, benefitting from the largest global sector growth through 2008 of 12.5%. Bertelsman is in a position to exploit the trend of TV watchers using the web at the same time, behaviour Nielsen describes as "mutually reinforcing media" that, surprisingly, is most common among the 35-54 age group.

The challenge to find the new business models

The usefulness of social networking sites is proportionate to the number of users they have and, for that reason, they need to remain free and advertising-supported. The challenge is that users feel 'ownership' over the spaces they create on these sites, which makes them less tolerant of advertising, and sites have yet to identify the 'magic recipe' that balances targeted ads without seeming to invade a user's privacy.

Despite the problems, report author Alex Burmaster said short-term concerns over the economy should not stop advertisers or media companies innovating in such a crucial space. They need a "magic bullet," he says that taps the potential of targeted advertising without

"The magic bullet will be forged advertisers and publishers partnering to developing new and creative ad formats and inventory models," he said. "That advertising will be based on the notion of having a conversation with consumers that is candid, authentic and adds value."

The strategy, he said, should be to approach social media like any other communication channel, embrace the consumer willingness to create and share content and encourage conversation and engagement about its brand across the web. It's a tough nut to crack, but the rewards will be rich for those who do.